Some firms offer “most favored customer” (MFC) agreements in which new discounts offered to future customers are applied retroactively to existing customers. Explain why these agreements represent weak commitments toward competing firms. Under what circumstances will these agreements facilitate tacit collusion among competitors?

a. Suppose firm X offers an MFC agreement. X will be reluctant to offer discounts to new customers. X’s rivals know this and realize that they do not need to price as aggressively to win new customers away from X. If X faces few competitors, then the MFC might facilitate price increases. But if X faces many competitors, those rivals might still vigorously compete against each other.